http://www.theaustralian.news.com.au/story/0,25197,24048781-30538,00.html

But it’s not clear exactly what crackdown he’s referring to, or why the problem wasn’t the fact that other lenders were not subject to the same “regulatory crackdown”.

I’ve also read opposite accounts of the degree to which the Basel II agreement is responsible: some (including Blundell-Wignall) claiming that it “reduced capitalisation” requirements which lead to irresponsible lending practices, others claiming stricter accounting rules are part of the reason that credit is frozen up, hence worsening the crisis.

http://online.wsj.com/article/SB119906606162358773.html

Still haven’t managed to find anything indicating what percentage of bad debt wrapped up in CDOs is subprime mortgage debt. The general assumption however seems to be that it was most of it.

BTW, do we have a number as to the percentage of subprime mortgages that were repurchased by Fannie or Freddie Mac?

I also wonder what percentage of the total “toxic assets” now clogging the financial system are based on subprime mortgages, as opposed to, say, unredeemable credit card loans etc.?

AIUI, most sub-prime lending was by independent largely unregulated lenders.

well not really, the lending was driven to a large extent by Fannie and Freddie’s willingness to repurchase the mortgages. This is the whole point – lenders were not making these loans in the expectation of carrying them themselves!

I haven’t seen many of those articles, I have to admit!

At any rate, I don’t still only understand the “politically motivated” suggestion, which to me implies that “politicians doing whatever they can to win votes” are to blame.

Hey look, in the mid-nineties, the CRA was amended!! And the focus of the amendments was to encourage further lending in urban and distressed rural communities, through securitisation of mortgages (ie that famous transfer of risk thing). And what evidence – that there were no more conceivable candidates for houses, ie adults able to hold a pen?

Actually, in Clinton’s defence, one argument is that there was not enough securitisation – ie if CALPERS held $200nb of RMBS which are worthless at current mark-to-market prices, it wouldn’t be a huge deal, because CALPERS can hang around and wait.

And further, later in the nineties, Fannie and Freddie, completely on their own without any encouragement from Washington, decided to lower the standard of mortgages they would accept for securitisation and get on board the sub-prime bandwagon, thus helping really accelerate this whole ‘houses-for-poor-people’ thing.

I wonder what you mean by the idea that the sub-prime loans business was politically driven.

I might be wrong but I thought that half the point, as fatfingers points out, was that Congress produced a decade or so of regulatory incentives to try and get more and more marginal people into houses.

Also, another interesting angle is the extent to which the secondary problem (ie the securitisation) can be characterised as regulatory arbitrage – regulated entities such as insurers and banks swapping regulated credit-risk for unregulated liquidity risk (ie buying high-liquidity-risk low-credit-risk senior RMBS tranches).

But Steve Randy Waldman is quite good, I think – from my perspective of rather limited information, he seems quite persuasive.

But the fact is – isnt it? – that there were no effective rules preventing lenders from lending to people who obviously couldnt afford the loans

It isn’t. In fact, as MichaelK refers to, it was imposed by government through the Community Reinvestment Act and its modifications. Reality check time – who in their right mind would lend to those who can’t pay it back?

There were no rules effectively constraining financial entrepreneurs from packaging up the loans into impenetrable financial instruments. Youd think that the lack of transparency of the instruments would have done these instruments in, but not a bit of it.

What is this crisis, but those instruments being ‘done in’?

The various historical bubbles you refer to are not ‘weaknesses’ – no-one claims relatively free markets deliver absolute macroeconomic stability, or that busts can be banished, or that companies and individuals won’t go broke. Instead, the freer the market, the better the self-correcting mechanisms can kick in, and the sooner things can return to the long-term trend.

My quote of the week.

Couldn’t have put it better. I understand that we all have our biases. If you’re “a little conservative” to quote Gilbert and Sullivan it’s hard not to have an instinctive sympathy for conservatives of other countries and ditto “little liberals”. But when one side goes nuts for a while, then you can tell those who let their ideologies do all the talking.

McCain is another turkey, a kind of high class George W.

Good rules for capitalism will be the good rules for a political system. You can’t have one without the other. So dictatorship is out; it has to be a democracy yes?

In that case, it has to be a parliamentary system. Presidential (executive not answerable to legislature) always falls into dictatorship.

The USA is the exception; it has not fallen into dictatorship. But it periodically goes nuts: civil war, depression, social Darwinism, depression, McCarthyism, Vietnam, Iraq these alongside the murder rate, incarceration rate, religiosity and underclass exploitation and doubtless other loopy features.

The present crisis will eventually fade. As a result there will be some good rules installed. But only some. And these half-baked fixes, whatever they are, will sooner or later be undone by some future administration for ideological reasons or to keep the cronies on side.

Relatively good rules for capitalism are in place elsewhere in the West but they will never be institutionalised in the US because it has a relatively bad system of government.

Good institutions, Richard Green, we can do. Trust may follow them. Without them there wont be trust. For example, the American knowledge that human nature is immutably bad is intrinsically self-fulfilling and the presidential system guarantees its fulfilment.

In short the situation in the US re rules of capitalism is hopeless. The wretched citizenry can only hope for some mitigation through international pressure in a globalised world.

http://www.nytimes.com/2008/09/27/business/27sec.html?_r=1&hp&oref=slogin

It’s been suggested more than once that such regulations are essentially already in place in the U.S., but regulators where either deliberately turning a blind eye, or were unable for whatever reason to enfore such regulations (laziness, incompetence, insufficient resourses, or maybe dodgy lenders had just got too clever at hiding their actions…).
Many of the subprime loans that were made appear to involve some amount of fraud, or at least falsely convincing a customer that they would be able to afford such a loan.

However it does seem there are substantial differences in regulations covering capitalisation requirements for lenders between Australia and the U.S., which helps explain why Australian banks have largely escaped unscatched.

The challenge is to put in place policies that actually work without doing more harm than good. The record appears to support the view that interventions in the market do not work, unless you have a broad definition of interventions to include formulating and policing “rules of the game” to minimise force and fraud, secure property rights and other good things. It is in the area of rules of the game that people from the different “sides” can meet on common ground and cooperate.

I don’t know what sort of regulations can be put in place to stop people trying to borrow more than they can afford. One of the functions of a well functioning market is to send signals to people who make mistakes so they are encouraged to learn and do better in future. The message of the Savings and Loans bailout was that the government will reward silly decisons by borrowers and lenders. So it is happening again. How surprising is that? And how desirable it it to send the same signal again?

On the topic of transparency, it is my understanding that McCain co-sponsored a regulatory proposal what would have brought into the open the extent of bad loans on the books of Fanny and Freddie. It is alleged that the proposal was blocked by the Democrats in the Senate committee. If that is the truth of the matter, then on the face of it you should in in favour of the proposal, whoever put it on table.

Please don’t suggest that I am a McCain/Republican supporter, you must know that I abhor the bipartisan stance on rafts of unhelpful intervention and big government. It is just a matter of applying the same rules to both sides and giving credit to each side when it is due.

Quiggin has it wrong. It was the quality of regulation that was at fault.

look how our regulators interpreted Basle2 for example.
Our Banks had much more capital and sub-prime loans are unknown in Australia for good reason.

Only the charlatans went near and forced those borrowers mostly to put up property to get a loan.

I wonder what you mean by the idea that the sub-prime loans business was ‘politically driven’. There were politics around the rules constantly, it’s true. But the fact is – isn’t it? – that there were no effective rules preventing lenders from lending to people who obviously couldn’t afford the loans (I’m not even necessarily saying there should be, but the fact is that what rules there were in this regard were ineffective.) There were no rules effectively constraining financial entrepreneurs from packaging up the loans into impenetrable financial instruments. You’d think that the lack of transparency of the instruments would have done these instruments in, but not a bit of it.

Now to a substantial degree that’s what’s behind the crisis. There are no doubt other things in the ‘witches brew’, but those two absences of regulation are at its core.

I really wonder sometimes Rafe, I wonder what it would take to get you onto the other side of one of these debates. Was it poor regulation and a similar ‘witches brew’ of nasties that delivered the south sea island bubble, the tulip mania? The Melbourne property boom of the 1880s? Or was it that free markets have some weaknesses that (gasp) policy can correct to some extent?

At the same time, many smaller banks said they were actually benefiting from the problems on Wall Street. Deposits are flowing in as customers flee riskier investments, and well-qualified borrowers are lining up for loans.

“We collect money from local savers, and we lend it in the local community,” said William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J. “We’re doing fine. There are 9,000 financial institutions out there, and most of them are small and most of them are doing fine.”